Yahoo shares sink on worries about Alibaba stake

MICHAEL LIEDTKE, AP Technology Writer

Yahoo Inc.'s prized investment in Chinese Internet company Alibaba Group has abruptly turned into a stock market millstone.

The weight drove down Yahoo's stock by 62 cents, or 3.6 percent, to close Friday at $16.55. It marked the third straight session that the stock has fallen because of Alibaba worries. The sell-off has reduced Yahoo's market value by about $2.5 billion, or nearly 11 percent.

The reason: a surprise disclosure by Yahoo on Tuesday that Alibaba had spun off its online payment service, Alipay.

The split caused investors to re-evaluate the value of Yahoo's 43 percent stake in Alibaba, one of China's most powerful Internet companies. To make matters worse, public bickering over the timing and handling of the Alipay spinoff has brought the rocky relationship between Yahoo and Alibaba into sharper focus. The dispute adds to the uncertainty about whether Yahoo will be able to make as much money from its Alibaba investment as analysts once thought.

The dustup also provides another reminder of the difficulties that face U.S. companies as they try to profit from China's Internet market, which promises to be lucrative because it's located in the world's most populous country. Not even Google Inc., the Internet's most powerful company, has been able to overcome the political and regulatory obstacles in China.

Frustrated in its own attempts to build its own business in China, Yahoo decided instead to keep a toehold in the country through a $1 billion investment made in Alibaba six years ago.

It looked like a smart move as Alibaba thrived through its various divisions, which include e-commerce sites Alibaba.com, Taobao and Yahoo China. Alibaba's success has helped bolster Yahoo's stock as Yahoo's own operations have struggled in recent years.

Some analysts believe Yahoo's Alibaba investment and a 35 percent stake in Yahoo Japan are worth $8 to $10 per share, accounting for about half of Yahoo's current market value. In a Friday research note, Gleacher & Co. analyst Yun Kim estimated that Yahoo's indirect stake in Alipay was worth about 65 cents per share, or about $850 million. Yahoo said it hopes to be compensated for the loss of Alipay.

Alibaba CEO Jack Ma has become more antagonistic since Carol Bartz, a brash Silicon Valley veteran, became Yahoo's CEO in January 2009.

Alibaba turned over Alipay to another company controlled by Ma. Alibaba said it wanted to ensure that the payment service complied with laws requiring it to be owned by Chinese. With Alipay under his control, analysts believe Ma could have more negotiating power if Yahoo tries to sell its stake in privately held Alibaba.

"This seems to us to be a very disturbing power-play by Jack Ma regarding the ownership structure of Alipay," Macquarie Securities analyst Ben Schachter wrote in a Friday note.

Yahoo said that the Alipay transfer occurred last August, but that it wasn't notified about it until March 31. Alibaba disputed the timing in a Friday statement. Alibaba said Yahoo's board, which includes Yahoo co-founder Jerry Yang, had been informed of the ownership change 13 months earlier during a July 2009 meeting.

Even if Yahoo's account of being notified March 31 is accurate, Schachter said it's still troubling that the company didn't let its shareholders know about it for another six weeks. At the very least, Schachter believes Bartz should have mentioned it April 19 when the company announced its first-quarter earnings.

Bartz will likely have to address the issue when Yahoo meets with analysts May 25 to discuss the company's turnaround efforts.